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March 23, 2011

The Obama Administration Is Slowly Reissuing Offshore Drilling Permits

March 23, 2011
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The Obama administration would like you to think that major strides have been taken to increase drilling in the Gulf of Mexico. But, that is hardly the case. The administration has been touting the four drilling permits it has issued, but in reality, but these are not new permits—they have only reissued four permits that it suspended last year. The Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) also touted its approval of Shell’s supplemental exploration plan in the Gulf of Mexico. But due to the way the approval process was set up by BOEMRE, it is very likely environmental groups will sue the plan before any work actually occurs.  These approvals are simply a mere drop in the bucket compared to what drilling and oil production could be garnered in the Gulf. We will applaud the administration’s actions when new work is actually occurring in the Gulf of Mexico.

Because of the moratorium and de facto moratorium, the United States has lost an estimated 110,000 barrels per day in 2010 and 250,000 barrels per day in 2011 in the Gulf of Mexico. The Obama administration also keeps postponing the approval of an oil pipeline from Canada. The administration cannot seem to figure out the environmental implications of a pipeline despite the fact that there are more than 50,000 miles of oil pipelines already in the United States.  And instead of drilling here, the Obama Administration is promoting offshore oil production in Brazil and placing the United States into an air combat situation with Libya, a member of the Organization of Oil Producing States (OPEC).  It seems that Mr. Obama’s administration will go to lengths to obtain oil supplies from everywhere but the United States and Canada.

The Reissuing of Permits

On February 28, 2010, BOEMRE issued its first deepwater permit since the BP oil spill in April 2010 to Noble Energy Inc., allowing the company to resume work on a well that it had already drilled to 13,000 feet. Initial drilling on the well began in 6,500 feet of water on April 16, 2010 and was suspended on June 12, 2010, due to the moratorium. So, it took BOEMRE 8.5 months to allow the drilling of this well to proceed.

On March 11, the second permit reapproved by BOEMRE for drilling in the deep water Gulf of Mexico went to BHP Billiton Ltd. BHP Billiton received a revised permit to drill Well SB 201 on Green Canyon Block 653 about 120 miles off Louisiana. Initial drilling of the well began on Feb. 16, 2010, in 4,234 feet of water.  Oil prices were trading at $106.95 per barrel on March 7, a 29-month high, when BOEMRE made its positive assessment on the drilling permit.

The third permit reissue occurred on Friday, March 18, as the BOEMRE allowed ATP Oil & Gas Corporation to resume deep water drilling in the Gulf of Mexico.  The permit given to ATP Oil & Gas Corporation is for a revised new well in Mississippi Canyon Block 941, 80 miles south of Venice, Louisiana.    The well, which was being drilled at ATP’s Telemark Hub in 4,000 feet of water, reached 12,000 feet.  ATP began drilling at the site in August 2008 and stopped drilling in July 2009. At the time the moratorium was imposed, a rig was preparing to install a production facility at the site.

While ATP is using a stationary drilling platform and the other two companies are using a mobile offshore unit, each of these companies will be using the same company and procedure to respond to a well blowout if one should occur—Helix Energy Solutions Group Inc.

On March 22, ExxonMobil became the fourth company to receive a reissue permit from BOEMRE for deep water drilling in the Gulf of Mexico. Unlike the wells being drilled by the three permits awarded earlier by BOEMRE, the Exxon well is new. However, the Exxon permit is also a reissue because Exxon had a rig on site and a permit to drill when BP’s oil well exploded.  The Exxon permit covers drilling in a Keathley Canyon Block in 6,941 feet of water, about 240 miles off the Louisiana coast. Exxon’s permit is the first approved by BOEMRE that will use an oil containment system developed by the Marine Well Containment Company, a coalition formed by major oil companies to develop undersea containment technology.

On March 21, BOEMRE approved Shell Offshore Inc.’s supplemental exploration plan to drill three exploratory wells in the Gulf of Mexico, which is an extension of a plan approved in 1985. The approved plan provides the framework for Shell to drill in 2,950 feet of water at its Cardamom Deep discovery about 255 miles southeast of Houston and about 130 miles from the Louisiana coast. The discoveries made in 2009 and 2010 could hold more than 100 million barrels of oil. Shell will have to obtain permits for each of these wells and has already applied for one of those permits. Unlike some of the other approvals, where BOEMRE waived the environmental assessment requirement, Shell did submit an environmental analysis that met the guidelines of the BOEMRE.

Shell’s well equipment will include sub-sea blowout preventers designed to cut off an uncontrolled surge of oil or gas, and in case of a blowout, it will tap containment equipment and vessels from the Houston-based Marine Well Containment Company. Under Shell’s worst-case scenario, a blowout at the site could spill 14.4 million barrels of oil over the 109 days it would take to drill a relief well.

Unfortunately, while Shell’s plan has been approved by BOEMRE, it now faces legal challenges from environmental groups, asserting that the government cut off a detailed review that is required under the federal National Environmental Policy Act. In any legal challenge, the federal government will have to defend its environmental assessment of Shell’s plan, but the red tape will cost U.S. consumers an increased delay in getting access to the oil resources.

Lost Gulf of Mexico Oil Production

The Energy Information Administration (EIA) forecasts U.S. oil production from the Gulf of Mexico (GOM) in its Short-Term Energy Outlook on a monthly basis. To obtain the amount of oil production lost from the Gulf of Mexico due to the Administration’s moratorium, we compared the estimated oil production in the GOM from EIA’s April 2010 STEO to that of its most recent forecast in its March 2011 STEO.  In early April 2010, the EIA was forecasting GOM oil production at 1.75 million barrels per day in 2010 and 1.65 million barrels per day in 2011. In EIA’s most recent STEO, its 2010 GOM oil production forecast, which is now essentially data, was 1.64 million barrels per day, 110,000 barrels per day lower. For 2011, the GOM oil production estimate in EIA’s March 2011 STEO is 1.4 million barrels per day, 250,000 barrels per day less than its April 2010 forecast.

Source: Energy Information Administration, Short-Term Energy Outlook, April 2010 and March 2011

Conclusion

The four permits issued by the BOEMRE are for activity that was suspended after Interior Secretary Salazar imposed a moratorium on deepwater drilling on the US Outer Continental Shelf. Only the Shell plan approval relates to new exploratory wells, but even that plan is an extension of a plan approved in 1985 and requires each well to obtain a separate permit.  According to Michael Bromwich, Director of the BOEMRE, there are still 13 new deep water exploration plans pending. And, he correctly notes that approval of the Shell plan will bring in more applications. He has even indicated that there is a “high probability” some offshore leases would be extended to account for the five-month drilling ban that followed the BP oil spill and subsequent permitting delays.

The slow process described by some as a permitorium or a de facto moratorium has resulted in at least one rig, the Noble Clyde Boudreaux, to leave the Gulf of Mexico for Brazil, where deep water drilling is finding a renaissance with a find of some 30 billion barrels of oil.

As Senator Mary Landrieu said, “While this is another step in the right direction toward getting our Gulf Coast back to work, this administration is still moving too slowly to get this industry back up and working at full speed. We will know that the oil and gas industry has once again found solid footing when we have reached a point where approvals for exploratory permits – or permits of any kind – are not considered newsworthy.”

 

 

 


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